Criticisms

The "value-added tax" has been criticized as the burden of it relies on personal end-
consumers of products.Some critics consider it to be a regressive tax,meaning the poor
pay more, as a percentage of their income, than the rich. Defenders argue that excising
taxation through income is an arbitrary standard, and that the value-added tax is in fact a
proportional tax in that people with higher income pay more at the same rate that they
consume more. The effective progressiveness or regressiveness of a VAT system can also
be affected when different classes of goods are taxed at different rates. To maintain the
progressive nature of total taxes on individuals, countries implementing VAT have
reduced income tax on lower income-earners, as well as instituted direct transfer
payments to lower-income groups, resulting in lower tax burdens on the poor.[4]

Revenues from a value added tax are frequently lower than expected because they are
difficult and costly to administer and collect. In many countries, however, where
collection of personal income taxes and corporate profit taxes has been historically weak,
VAT collection has been more successful than other types of taxes. VAT has become
more important in many jurisdictions as tariff levels have fallen worldwide due to trade
liberalization, as VAT has essentially replaced lost tariff revenues. Whether the costs and
distortions of value added taxes are lower than the economic inefficiencies and
enforcement issues (e.g. smuggling) from high import tariffs is debated, but theory
suggests value added taxes are far more efficient.

Certain industries (small-scale services, for example) tend to have more VAT avoidance,
particularly where cash transactions predominate, and VAT may be criticized for
encouraging this. From the perspective of government, however, VAT may be preferable
because it captures at least some of the value-added. For example, a carpenter may offer
to provide services for cash (i.e. without a receipt, and without VAT) to a homeowner,
who usually cannot claim input VAT back. The homeowner will hence bear lower costs
and the carpenter may be able to avoid other taxes (profit or payroll taxes). The
government, however, may still receive VAT for various other inputs (lumber, paint,
gasoline, tools, etc.) sold to the carpenter, who would be unable to reclaim the VAT on
these inputs (unless of course the carpenter also has at least some jobs done with receipt,
and claims all purchased inputs to go to those jobs). While the total tax receipts may be
lower compared to full compliance, it may not be lower than under other feasible taxation
systems.

Because exports are generally zero-rated (and VAT refunded or offset against other
taxes), this is often where VAT fraud occurs. In Europe, the main source of problems is
called carousel fraud. Large quantities of valuable goods (often microchips or mobile
phones) are transported from one member state to another. During these transactions,
some companies owe VAT, others acquire a right to reclaim VAT. The first companies,
called 'missing traders' go bankrupt without paying. The second group of companies can
'pump' money straight out of the national treasuries.[citation needed] This kind of fraud
originated in the 1970s in the Benelux-countries. Today, the British treasury is a large
victim.[5] There are also similar fraud possibilities inside a country. To avoid this, in some
countries like Sweden, the major owner of a limited company is personally responsible
for taxes. This is circumvented by having an unemployed person without assets as the
formal owner.[citation needed]

The VAT Regime in Ethiopia

3.1 Basic Notion
The Value -Added Tax (VAT) proclamation No 285/2002 which has rescinded and
replaced the sales and excise tax proclamation No. 68/1993 (as amended) and which has
come into force as of January 1st, 2003 is a consumption tax which is levied and paid as
value added tax at a rate of 15 percent of the value of every taxable transaction by a
registered persons, every import of goods, other than an exempt import and an import
service rendered in Ethiopia for a person registered in Ethiopia for VAT or any resident
legal person by a non resident person who is not registered for VAT in Ethiopia.
(Article 7 (1) (a)-(c) and Article 23 (1) and (2))
A taxable transaction is a supply of goods or a rendition of services in Ethiopia in the
course or furtherance of a taxable activity other than an exempt supply. (Article 7(3))
A taxable activity is any activity, which is carried on continuously, or regularly by any
person in Ethiopia, or partly in Ethiopia, whether or not for a pecuniary profit that
involves, in whole or in part, the supply of goods or services to another person for
consideration. (Article 6 (1) and (2))
Supply means the sale of goods or rendition of services or both and rendition of services
means anything done, which is not a supply of good or money. (Article 2(17) and Art.
4(1))
For the purpose of the VAT proclamation the following are considered as taxpayers on
whom the VAT law is applicable. These are: -
(a) A person who is registered or is required to register for VAT;
(b) A person carrying out a taxable import of goods to Ethiopia;
(c) A non-resident person who without registration for VAT renders service in
Ethiopia for any person registered in Ethiopia for VAT or any resident legal
person (Article 3(1), (a)-(c)-cum Article 23 (1) and (2))
For the purpose of the VAT proclamation “person” means any natural person, sole
proprietor, body, joint venture, or association of persons. (Article 2(11))
Article 2 (15) of the Proclamation, which deals with definition, states that “Resident
person” shall have the meaning given to it under the Income Tax Proclamation.
The new Income Tax law of Ethiopia Proclamation No 286/2002 defines and/or outlines
who and what constitutes a resident in Ethiopia.
Article 5 defines and outlines the principle of residence. Accordingly under Article 5 (1)
(a)-(b) an individual shall be resident in Ethiopia. If he:
12
a. Has a domicile within Ethiopia;
b. Has a habitual above in Ethiopia; and or
c. Is a citizen of Ethiopia and a consular, diplomatic or similar official of
Ethiopia posted abroad.
Pursuant to article 5 (2) an individual, who stays in Ethiopia for more than 183 days in a
period of twelve (12) calendar months, either continuously or intermittently, shall be
resident for the entire tax period.
With regards to a body, pursuant to Article 5 (3), a body shall be resident in Ethiopia,
if it;
a. Has its principal office in Ethiopia;
b. Has its place of effective management in Ethiopia and/or
c. Is registered in the trade register of the Ministry of Trade and Industry
It should be noted that according to Article 5(4) “Resident person” includes a permanent
establishment of a non-resident person in Ethiopia.
3.2 VAT Rate
The VAT law contains two VAT rates. One is the standard 15 percent rate and the other
is zero-rated.
The following taxable transactions are charged with tax at a rate of zero percent.
a. The export of goods or services
b. The rendering of transportation or other services directly connected with
international transport of goods or passenger, as well as the supply of
lubricants and other consumable technical supplies taken on board for
consumption during international flights
c. The supply of gold to the National Bank of Ethiopia; and
d. A supply by a registered person to another registered person in a single
transaction of substantially all of the assets of a taxable activity or an
independent functioning part of a taxable activity as a going concern.
[Article 7 (2) (a) - (d)]
There is a basic difference between VAT exemption and zero rate VAT. The difference is
that though zero rate transactions do not pay VAT on the goods and services they render
under transactions listed in (a) – (d) above, for the purpose of VAT registration they are
considered as taxable service thus enabling and making these transactions eligible for
collecting tax rebate.
13
This has the advantage of granting VAT rebate which can help redress in put tax paid on
purchase of goods and services necessary for the furtherance of the zero rated
transactions.
On the other hand, VAT exemptions granted by the VAT law does not allow for the
collection or entitlement of VAT rebate for the simple reason that they are assumed not to
have paid in put tax, therefore disabling exempt categories from registering for VAT and
taking advantage of the VAT rebate provisions.
3.3 Registration
Under the VAT law any person who carries on a taxable activity and at the end of any
period of 12 calendar months has made, during that period, taxable transactions the total
value of which exceeds 500,000 Birr or at the beginning of any period of 12 calendar
months there are reasonable grounds to expect that the total value of taxable transactions
to be made by the person during the period will exceed 500,000 Birr, has the obligation to
register for VAT. (Article 16(1)(a) and (b))
According to Article 17, a person who carries on taxable activity and is not required to be
registered for VAT, may voluntarily apply to the Tax Authority for such registration, if
he regularly is supplying or rendering at least 75% of his goods and services to registered
persons.
3.4 Exemption for Specific Categories of Goods and Services
Tax-exempt goods and services are supplies on which VAT, both the standard rate and
zero-rate tax, are not paid on.
If a person who is engaged in a taxable activity that fully falls under the tax-exempt
category, such a person cannot register for VAT.
If a person is engaged partially in a tax exempt category activity and partially in a taxable
activity, such person can not register for VAT and be legible for tax rebate which could
be beneficial to redress cost paid for in put tax on his taxable transactions.
Under the VAT Law, the following types of supplies of goods (other than by way of
export) or rendering of services as well as the following types of imports of goods are
also exempt from payment of VAT;
a. The sales or transfer of a used dwelling, or the lease of a dwelling;
b. The rendering of financial services;
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c. The supply or import of national or foreign currency, and of securities;
d. The import of good to be transferred to the National Bank of Ethiopia;
e. The rendering by religious organizations of religious or church related services;
f. The import or supply of prescription drugs and the rendering of medical services;
g. The rendering of educational services provided by educational institutions, as well
as child care service for children at pre – school institutions;
h. The supply of goods and rendering of services in the form of humanitarian aid, as
well as import of goods transferred to state agencies of Ethiopia and public
organizations for the purpose of rehabilitation after natural disasters, industrial
accidents and catastrophes;
i. The supply of electricity, kerosene, and water;
j. Goods imported by the government, organizations, institutions or projects
exempts from duties and other import taxes to the extent provided by law or by
agreement;
k. Supplies by the post office;
l. The provision of transport;
m. Permits and license fees;
n. The import of goods to the extent provided under schedule two of the customs
tariffs regulations;
o. The supply of goods or services by a workshop employing disabled individuals if
more than 60 percent of the employees are disabled; and
p. The import or supply of books and other printed materials. (Article 8(2) (a)-(p))
By virtue of Article 8(4), the Minister of Finance and Economic Development may by
directive exempt other goods and services. In a similar manner Income Tax Proclamation
No 286/2002, Article 13 (e) has empowered the Council of Ministers and the Minister of
Finance and Economic Development to exempt by regulation any income for economic,
administrative or social reasons.
All The aforementioned exemptions have a common feature and that is; they are designed
and intended to encourage and enhance the health, education and financial sector of the
economy and to protect and promote social and public interest; and the exemptions have
been granted for economic, administrative or social reasons.
The Council Ministers for the proper interpretation of the VAT proclamation issued the
Value-Added Regulation No 79/2002.
The major areas on which proper and broader interpretation has been rendered include
exemptions granted by the VAT proclamation whereby general areas of exemptions have
been listed without detailed interpretation and implementation terms and conditions. In
this regard, the regulation clearly states what falls under the exempted items and what
does not fall under or constitute exemption under the VAT proclamation. These
exemptions include inter-alia provision relating to religious or church-related services
and provisions relating to supplies of humanitarian aid.
The Regulation provides that generally, services rendered by a religious organization that
are integral to the practice of that religion come within the exemption. The donation in
15
kind or money (such as church plate donation) or services is not subject to tax if there is
no direct link between the payment and any benefit received by the donor. (Article 23 (1),
(2), (4) and (6))
However, the activities of a religious organization that compete with the private sector or
that are not integral to the practice of the religion do not come within the exemption. In
which case if the value of these taxable supplies exceed the threshold of 500, 000 Birr,
the religious organization must register. A religious organization that operates taxable
activities through a development commission or similar entity must separately register
the commission or the similar entity.
The Regulation also provides that the exemption for supplies of humanitarian aid applies
to goods imported or purchased locally by organizations registered as humanitarian
organizations for such purpose. (Article 26 (1) and (2))
The exemption covers the import of goods or purchase of goods locally with an
announcement or declaration of a natural disaster, industrial accidents, or catastrophe by
the Disaster and Prevention Commission.
The Regulation contains a provision that deals with import exempt by law or agreement.
An exemption by agreement covers tax exemption for certain import of goods only if the
agreement is entered into by the government or the agreement is entered into with
permission granted by the government. (Article 28 (3) and (4))
The exemption by agreement includes exemption provided under;
a. A technical assistance or humanitarian assistance agreement entered into between
a government of any country;
b. The Diplomatic Immunities and Privileges Convention;
c. An International Convention having the force of law in Ethiopia; and
d. Any other multilateral agreement to which Ethiopia is a party.
3.5 Tax Credit, Procedures For Filling Tax Return and Payment of VAT and
VAT Refund or Rebate.
3.5.1 Tax Credit
Under the VAT law the amount of VAT that is creditable is the amount of VAT payable
(paid) by a registered person in respect of tax invoices or customs declaration issued to
the person for:
a. Imports of goods that take place during the current accounting period; and
b. Taxable transactions involving the supply of goods or rendering of services that
are considered to take place during the current or preceding accounting period.
16
Where the goods or services are used or are to be used for the purpose of the registered
person’s taxable transactions. (Article 21(1)(a) and (b))
In cases where only a part of the supplies made by a registered person during a tax period
are taxable transactions, the amount of tax credit or rebate for that period is determined;
a. In respect of a supply or import received, which is directly allocable to making of
taxable transactions, the full amount of tax payable in respect of the supply or
import is allowed as credit or debate.
b. In respect of a supply or import received which is directly allocable to the making
of exempt transaction, no amount of tax payable in respect of the supply or import
shall be allowed as a credit or will be allowed as a credit.
c. In respect of a supply or import received which is used both for the making of
taxable and exempt transactions, the rule of apportionment of the credit will be
determined by a directive to be issued by the Ministry of Revenue.
(Article 21 (2) (a) – (c))
Where VAT indicated in the VAT invoice or customs declaration for a transaction
exceeds VAT payable on this transaction, the registered person is allowed a credit for the
amount of the excess in the accounting period in which the event referred to occurred.
However if the supply was made to a person who is not a registered person, no credit will
be allowed unless the excess tax has been repaid to the recipient of the supply.
(Article 21(5)
A person who registers for VAT after the introduction of VAT will be entitled to credit in
the first accounting period in which the person is registered for VAT paid or payable on
goods (including capital goods) that are on hand on the date of registration.
However this will be applicable only to the extent that the purchase or import of the
goods occurred not more than six months prior to the date of registration. (Article 21(6))
A beneficiary of the duty draw – back scheme under proclamation No. 249/2001 - a
proclamation to establish Export Trade Duty Incentive Scheme is not entitled to a refund
of VAT paid on imports under the VAT credit system of the VAT law. (Article 21(7))
3.5.2 Procedures for Filling Tax Return and Payment of VAT
Under the VAT law every registered person is required to: (a) File a VAT return for each
accounting period, whether or not tax is payable in respect of that period; and (b) pay the
tax for every accounting period by the deadline for filing the VAT return. The VAT
return for every accounting period must be filed not later than the last day if the calendar
month following the accounting period. (Article 26, 1(a) and (b) and (2))
17
3.5.3 VAT Refund or Rebate
If at least 25 percent of the value of a registered person’s taxable transactions for the
accounting period is taxed at a zero rate, the tax authority will refund the amount of VAT
applied as a credit in excess of the amount of VAT charged for the accounting period
within a period of two months after the registered person files an application for refund,
accompanied by documentary proof of payment of the excess amount. (Article 27(1))
In the cases of other registered persons, the amount of VAT applied as a credit in excess
of the amount of VAT charged for the accounting period is to be carried forward to the
next five accounting periods and credited against payments for these periods, and any
unused excess remaining after the end of this five- month period shall be refunded by the
tax authority within a period of two months after the registered person files an application
for refund, accompanied by documentary proof of payment of the excess amount.
(Article 27 (2))
Where the tax authority is satisfied that a person who has made an application for refund
has overpaid tax, the tax authority shall first apply the amount of the excess in reduction
of any tax, levy, interest, or penalty payable by the person under the VAT proclamation,
the customs proclamation, the income tax proclamation, or the sales and excise tax
proclamation and then repay any amount remaining to the person if the amount to be
refunded is more than 50 Birr. (Article 27 (5) (1) (a) and (b))
If a registered person is entitled to a refund and the tax authority is satisfied that the
person has overpaid tax, than if the tax authority does not pay the refund within the
specified two months period, the tax authority will pay the person entitled to the refund,
interest set at 25% (twenty five percent) over and above the highest commercial lending
interest rate that prevailed during the preceding quarter. (Article 27(6))
3.6 Non - compliance with VAT Proclamation
Non-compliance with VAT Proclamation failure to register for VAT as per VAT
registration requirement, failure to issue a tax invoice, failure to maintain recorder such
as original tax invoices received and a copy of tax invoices issued and failure to file
timely return shall be liable to administrative penalties ranging from a fine 100 percent of
the amount of tax payable and a fine of up to 50,000 Birr.
In addition to administrative penalties tax offenders such as tax evasion, making false or
misleading statement, and failure to notify are all criminal offences under Ethiopian law.
Accordingly, tax fraud - making false or misleading statements is punishable with a fine
ranging from 1000 Birr to 100,000 Birr and an imprisonment ranging from 3 years to five
18
years where the making of false or misleading statement is made knowingly or recklessly
such an offence is punishable by a fine of up to 200,000 Birr of an imprisonment of up to
15 years.
3.7 The Implication of VAT on NGOs in Ethiopia
NGOs are exempt from charging VAT i.e. they are not registered to collect VAT as they
are not working for profit. This means that whenever they provide services, they are not
expected to include VAT charges.
However, they are expected to pay VAT charges whenever they purchase goods and
services locally although they are not working for profit and do not add value to their
services.
Nonetheless, NGOs that are directly engaged in relief operations in the country have
special privilege that exempts them from paying VAT, given by a directive issued by the
DPPC to the VAT Department. These are a list of NGOs identified by DPPC who
purchase relief aid and/or services that they buy from local markets. Other NGOs may
also have that this kind of exemptions through bi-lateral or multi-lateral agreements or
understandings with the government. Please note that these NGOs may implement
development programs through food for work such as construction of roads, schools,
health clinics etc.
Parallel to this, many other NGOs are expected to pay VAT whenever they purchase
materials and services to construct the same schools, health clinics, youth centers that
will be handed over to the respective line ministries or, regional bureaus for the use of
communities.
3.8 The Implication of Other Taxes on NGOs in Ethiopia
3.8.1 Import Custom Duties
The Ethiopian law provides that capital goods imported by NGOs would enter into the
country free of duty on the basis of project approved by the Federal Government or
Regional Government organs. Privileges granted by the Federal Government
organizations to NGOs are binding upon and enforceable in various regions of the
country, as project agreement concluded at the national level would encompass or benefit
two or more regions. On the other hand privileges granted by regions will be enforceable
only within the limits of their geographical boundaries.
NGOs are exempted from customs duties on imported capital goods, upon ascertainment
by the Investment Authority that;
19
• The goods are related to projects; and
• Qualify for customs duties exemption under the investment law after examination
of project documents submitted to it by the appropriate Federal Agency or
Regional Government Bureau.
The Disaster Prevention Preparedness Commission pays, through budgetary allocation,
customs duties on foodstuff, medical equipment and similar other supplies imported by
NGOs in response to an emergency relief call made by it.
With the exception of capital goods included in approved projects, NGOs are paying
customs duties on other imported goods or services that are used to run their office and
further their humanitarian and development work.
The Problem with Import Customs Duties is that NGOs are paying customs duties on
imported goods other than the ones included in approved projects. Imported goods for
office use and related activities are all taxable like commodities of the private business
sector. This discourages NGOs and donor partners that are willing to assist and support
various programs in the country.
3.8.2 Income Tax Exemption
Quite a number of NGOs are engaged in income - generating schemes through the
following activities:
a. Economic activity to enhance sustainability of the development program,
b. Project related activity which produces some income incidentally in the course of
the project implementation,
c. Collection of fees to recover a portion of total costs, and
d. Fund-raising event organized to collect public donation. (Surprisingly, in
Ethiopia, individuals or groups of people who organize fund - raising events for
self -serving purpose are not taxable.)
3.8.2.1 Income Tax Exemption from Income Generating
Activities and Donations
The draft NGO Proclamation recognizes the need and provides for an association or
NGO to engage in income generating activities with a view to plough back the income
generated to expand the activities envisaged in its memorandum of association.
20
In this regard Article 55 (1) of the draft states that, "to realize its objective any
organization may engage in income generating activity related to its mission or to the
organization".
It also states, in Article 55 (2) that "before engaging in income generating activity an
organization shall ensure that the activity will not hamper the mission of the organization
or damage the interest of the beneficiaries".
It should be noted however; in order to avoid abuse and market distortions, the practice in
this regard of many countries is to limit the amount of income that can be generated by
such activities. Normally the amount permitted does not exceed one - third of the total
income of the concerned NGO.
Article 55 (3) of the draft states that relevant laws shall be applicable to an organization
engaged in income generating activity. The "relevant laws" refered to in this draft
provision can relate to Income Tax Proclamation No 286/2002 whereby NGOs can be
taxed on income derived from income generating activities just like any other business or
for profit organization.
In this context, "relevant law" can also relate to the commercial code of Ethiopia. It can
also relate to the labor Proclamation No 42/93 as amended by Proclamation No 377/2003.
The issue of income generating activities is an unsettled issue that needs further study and
follow up as the draft NGO legislation is still at a preparatory stage and we don't know
what the details and content of this key provision will be.
Apart from critical issues of tax exemption on income from income generating activities
that need to be addressed, there are other equally important legal issues that need to be
revised in order to confirm with these new developments.
In this connection a case in point is Article 25 of the Commercial code which states that
associations or NGOS can not carry on any trade and if they are found to be in violation
of this cardinal principle it can constitute a ground for dissolution of the NGO in
accordance will Article 461 of the Civil Code of Ethiopia
However, it should also be noted that the inclusion of such a provision in the draft NGO
legislation is commendable and a welcomed change as far as current developments in
Ethiopia are concerned.
In a similar vain, the draft proclamation has also made provision for income tax
exemption. This article will also be welcome change to the existing laws and practice.
With regards to income generating activities, Article 55(1) of the draft proclamation
states that "to realize its objectives any organization may engage in income generating
activity related to its mission or to the organization".
21
In this regard, Article 56 (1) states, "any organization shall be exempted from income tax
on donation it receives".
Further more, Article 56 (2) states "an individual who donates money to any organization
shall be granted deduction according to the amount of money he donated for income tax
purpose". In other words donors will be entitled to income tax deductions with respect to
donations made to NGOs.
In this connection, it should be noted that the Income Tax Law of Ethiopia, Article 21 (2)
states that the council of Ministers may be regulation allow donations or gifts provided
for public use to be deducted.
In order to create enabling tax environment, NGOs had and are still recommending that;
a. NGOs should be exempted from income tax on the net profit earned from their
economic activities, where such activities do not constitute the principal purpose
or activity of the organizations.
b. NGO activities, run on a fee basis as cost recovery, should not be taxed on the
ground that there is no net revenue generated by these activities.
c. NGOs should be exempted from income tax on the profit made from income
generation activities, where such revenue is not used for self - serving purposes
but used as plough back to the NGO humanitarian and community development
program and projects.
d. Income raised by indigenous NGOs through local fund - raising events such as
bazaars, sport and other entertainment events or bake sale should not be subject to
taxation, since the net income represents the free donation of the public to the
cause the events are organized for.
e. Donors should be entitled to income tax deductions with respect to donations
made to NGOs.
f. Income - generating activities supported by NGOs but owned by beneficiaries
should be taxed as any other business venture, as they are self - serving in nature.
3.8.2.2 Income Tax Exemption of INGO International Staff
Under the new Income Tax Law of Ethiopia, salaries and benefits of international staff is
subjected to income tax. Most INGO international staff contracts assume no payment of
income tax in the country of operation.
The new Income Tax Law provides also for exceptions to the general rule. Accordingly
the tax law provides for exemption from tax based on international law, customs and
usage – comity, treaty or bilateral agreements.
Ethiopia has through out the years granted privileges and exemptions from taxation based
on economic, social and public interest policy considerations. Tax exemptions granted to
promote investment and economic development is a case in point.
22
The precedence of granting tax exemptions has been in place for more than four decades.
This has been done on a selective and on a case – by – case basis.
Should INGOs international or expatriate staff be granted income tax exemption? What
are the arguments that can be forwarded in favor of granting exemption?
The case at hand and the mix of the problem can be categorized and presented in ten
points, which are all complementary, and collectively they do not only present the case
clearly, but also offer a persuasive and compelling argument that needs all the serious
consideration that it duly deserves and these are:
1. Most INGO international staff contracts assume no payment of income tax in country
of operation.
2. Income tax is often already deducted in the home country of international staff.
3. Collecting taxes from employees whose payroll in administered in the INGO’s home
office would be expensive and complex to administer.
4. As charitable organizations, many INGOs receive funds exempted from taxation.
5. Many INGOs deliberately maintain a small number of international staff who bring
into Ethiopia new program development ideas from their experience in other
countries and help to facilitate the personal and professional development of local
employees.
6. We need the international staff to solicit further funding and maintain the cycle of
funding in the future. They are a link between INGO programs and donors.
7. The taxing of INGOs could significantly hamper the government’s efforts at poverty
alleviation in rural and urban communities.
8. Most donors are reluctant to give funds that they know will be used to pay taxes on
international staff salaries.
9. INGO home offices have already confirmed that they would not increase INGO
budget to make up for this tax.
10. The imposition of the tax will harm INGO programs in Ethiopia by;
a. Reducing funds for programs, notably service delivery and capacity building in
pursuit of poverty eradication or relief activities;
23
b. Reducing their ability to recruit international staff for management, transfer of
skills and to provide diversity and cross – learning;
c. Reducing the number of NGOs in Ethiopia.
On the other hand it can strongly and persuasively be argued that as Ethiopian Income
Tax Law is not based on nationality principle but on resident principle, for tax purpose
they are considered as tax payers and must thus declare their income and pay tax and
where the international stuff for expatriate is paid here in Ethiopia on a payroll basis, the
concerned NGO must present the payroll to the tax authority and pay income tax.
What is the way out? One viable option is to grant income exemption of international
staff or expatriates by concluding an agreement with the Ministry of Finance and
Economic Development i.e. a bilateral agreement to be concluded between the concerned
NGO or by the donor government and the competent authorities of Ethiopia.
Pursuant to Article 53 of the Ethiopia Income Tax law, NGOs have the obligation to
withhold income tax on payments, which are subjected to withholding tax.
The amount to be withheld is two percent (2%) of the gross amount of the payment.
Within ten days from the last day of each month, the concerned NGO must transfer to the
Tax Authorities the amount required to be withheld on payments made during the month.
If the NGO fails to withhold or under withholds it shall be made to pay the full amount of
the tax to the Tax Authority.(Article 53 (1), (2) and (51))
Under Tax withholding scheme Application Council of Ministers Regulation No
75/2001, NGOs collect withholding tax from taxpayers who provide a wide range of
services and goods.
This includes consultancy service, designs, written materials, lectures and dissemination
of information service, legal, accounting, auditing and other similar services,
advertisement service, maintenance services, construction services rent or lease of
equipment building and other goods and supply of goods involving more than Birr 10,000
(Ten thousand) in any one transaction. (Article 2 (1) - (11))
Pursuant to Article 8 of the Income Tax Law, which deals with schedules of income,
rendering of technical services falls under schedule "o".
In this regard, Article 32 of the Income Tax Law provides that all payments made in
consideration of any kind of technical service rendered outside Ethiopia to a resident
person in any form shall be liable to tax at a flat rate of ten percent (10%), which shall be
withheld and paid to the Tax Authority by the payer. The term "technical service" means
any kind of expert advice or technological service rendered. (Article 32 (1) and (2))
24
Under Article 23 of the Value - Added Tax Proclamation, if a non resident person who is
not registered for VAT or any resident legal person, the rendering of services is taxed
according to Article 23 which deals with reverse taxation.
Under Article 54 of the Income Tax Law of Ethiopia, NGOs have the obligation to
withhold ten percent (10%) from the payment made to expatriates who have rendered
technical service to the NGO. The obligation of the NGO to withhold such tax has
priority over all other obligations to withhold amount from payment to the payer or the
service provider. Such payments must be made with fifteen (15%) days of the end of each
calendar month. (Article 54(1), (2) and (3))